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What is Two Factor Authentication
Two Factor Authentication (2FA) is a method that requires the input from two different sources for the authentication of a user on a system. Often these two factors are “something that you know” (your password), and “something that you have” (your smart-phone); Authentication now consists of confirming you know the combination of the username and password, and you have the smartphone that can generate a valid Time-based One-Time Password.
In contrast to a method which only requires input from one single source, e.g. the password, 2 Factor Authentication provides an extra level of protection, and the use of one-time passwords assures the credentials can not be replayed.
For more information, please take a look at this blogpost and Wikipedia.